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Could an investment be too good to be true?

Lost amidst the earnings reports by such investor favorites as Apple and Procter & Gamble were the earnings reports of the auto retailers.

I'm not talking about the auto manufacturers like Ford and Toyota. I'm talking about the retailers who simply sell, and in many cases, repair, cars and trucks. I was surprised to learn that a handful of these companies are publicly traded and that some of the retailers have dealerships all across the country.

A bunch of them recently reported earnings and they didn't just have good quarters, they had unbelievable quarters. They had the kind of quarters most businesses only dream about.

Auto Sales Returning To "Normal"

But how is that possible more than three years into the auto recovery? It's not as as if auto sales haven't been rising the last few years. Car sales bottomed in 2009 at 10.4 million and have been steadily rising ever since. Automobile analysts expect 2013 sales of 15.1 million. That is near a "normal" auto sales market for the United States.

But a perfect combination of improving credit availability with zero down loans, pent up demand from buyers driving older cars for longer than they otherwise would have, and a housing market recovery fueling pick-up sales, has resulted in the best of times for the retailers.

Three Auto Retail Stocks With the Best Fundamentals

Even though the auto stocks have had big run-ups, it's not too late to get into the sector. Valuations are still attractive. The companies are also expected to have double digit earnings growth this year as analysts expect the growth to remain through 2013 and possibly into 2014.

It doesn't get much better than buying both solid fundamentals and big earnings growth.

However, not all of the auto retailers are created equal. These three auto retailers have the best combination of fundamentals and the Zacks Rank in the sector. All three are Zacks Rank #2 (Buy) stocks.

  1. Lithia Motors Inc.
  2. Asbury Automotive Group
  3. Autonation Inc.

1. Lithia Motors (LAD - Snapshot Report)

Lithia Motors is the 9th largest auto retailer in the United States with 88 stores in 11 states. It has both rural and urban stores which allows it to be a good indicator of what is happening in the overall economy.

On Apr 24, it beat the Zacks Consensus Estimate by 16%. Same store sales growth was phenomenal, growing by 18.8%. New cars same store sales jumped 22% while used car same store sales rose 21.5%.

Heck, even Service, Body & Parts was strong, with same store sales up 7%.

Lithia also guided higher, the 13th consecutive quarter it has done so.

Forward P/E= 13.7
Expected EPS growth in 2013= 22%
Zacks Rank #2 (Buy)

2. Asbury Automotive Group (ABG - Snapshot Report)

Asbury Automotive is among the largest auto retailers with 76 auto retail stores across the United States.

On Apr 24, it reported its fourth consecutive record quarterly results. Like Lithia, new and used car sales were strong. New car same store sales jumped 13.9% and used car same store sales rose 14.4%.

Forward P/E= 13.3
Expected EPS growth in 2013= 15.8%
Zacks Rank #2 (Buy)

3. Autonation (AN - Analyst Report)

Autonation is the largest of the auto retailers with 262 new vehicle franchises in 15 states. It recently began a rebranding campaign to bring all of its stores under the Autonation brand. It has completed 30% of the rebranding.

New car same store sales rose 6% while used car same store sales increased 6.7%.

Forward P/E= 15.2
Expected EPS growth in 2013= 12.1%
Zacks Rank #2 (Buy)

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Tracey Ryniec is the Value Stock Strategist for Zacks.com. She is also the Editor of the Turnaround Trader and Value Investor services. You can follow her on twitter at @TraceyRyniec.

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Zacks #1 Rank Top Movers for Zacks #1 Rank Top Movers

Company Symbol Price %Chg
RPC INC RES 24.91 +8.35%
LITHIA MOTO… LAD 94.59 +4.60%
DELTA AIR L… DAL 39.15 +3.90%
FLAMEL TECH… FLML 14.51 +3.50%
SOUTHWEST A… LUV 28.87 +2.92%